IMF: Greece doesn’t need more austerity, cuts went too far

Greece does not need more austerity at this time, and in fact spending cuts have gone too far already, two senior International Monetary Fund officials said Monday (12 December).

If the eurozone country sticks to its agreement with the European Union to increase its budget surplus to 3.5%, contrary to the IMF’s recommendation, then it cannot blame the fund if it must impose more austerity to do so, the officials said in a blog post.

IMF chief economist Maurice Obstfeld, and European Department Director Poul Thomsen, who has been heavily involved with the negotiations with Greece, used the blog to defend the IMF against misinformation they say “turns the truth upside down.”

Sixty-three years after the 1953 London Debt Agreement (8 August), Greece’s Prime Minister Alexis Tsipras stressed that Europe should rise to the occasion and grant Athens a debt relief.

After days of demonstrations in Greece over new budget cuts, the officials said, “The IMF is being criticized for demanding more fiscal austerity, in particular for making this a condition for urgently needed debt relief.”

But in fact, “The IMF is not demanding more austerity,” they said. “We have not changed our view that Greece does not need more austerity at this time. Claiming that it is the IMF who is calling for this turns the truth upside down.”

On the contrary, the fund warned Greek officials against trying to push for a larger primary surplus — the surplus on the public finances before debt repayments — than the 1.5% the IMF said was achievable.

“But contrary to our advice, the Greek government agreed with the European institutions to temporarily compress spending further if needed to ensure that the surplus would reach 3.5% of GDP” as part of the loan agreement with the European Stability Mechanism, the eurozone’s bailout fund.

“We think that these cuts have already gone too far, but the ESM program assumes even more of them,” Obstfeld and Thomsen wrote.

The Greek government has invited the leaders of five southern EU countries, including France, Italy and Spain, to Athens in a bid to forge an anti-austerity alliance.

Eurozone finance ministers a week ago approved new debt relief measures to alleviate Greece’s colossal debt in the wake of its huge €86-billion bailout, but the short-term measures, while welcome, fall short of what the IMF has said is needed.

The fund has remained adamant it will not participate in another loan program unless the elements, including debt sustainability and the fiscal reforms needed to achieve the surplus target, are credible.

In their blog the officials repeated that “Greece’s debt is highly unsustainable and no amount of structural reforms will make it sustainable again without significant debt relief”.

The IMF played a major part in two earlier rescues for Greece, but balked at the third one for €86 billion in 2015 because it said Athens would not get back on its feet unless its mountain of debt were cut outright.

The EU has maintained a hardline stance on debt relief, led by Germany’s powerful finance minister, Wolfgang Schäuble as key elections approach next year in Germany and the Netherlands, where bailout fatigue is running rife with voters.

Background

EURACTIV's editorial content is independent from the views of our sponsors.

Media is a pillar of democracy – as long as it can function properly. Now more than ever we need unbiased, expert information on how and why the European Union functions. This information should not be behind a paywall, and we remain committed to providing our content for free.

We know our readers value our reporting. We know journalism that covers the EU in a clear, unbiased way is critical to the future of the European Union. And we know your support is critical for ensuring this independent and free journalism.

Don’t take the media sector for granted. It was already fragile before the coronavirus pandemic. And as people can’t meet, media companies have lost a major source of revenue: events. EURACTIV is supported by a mix of revenue streams including sponsorships, online advertising, EU-funded projects, and policy debates. All of these sources of revenue are impacted by the current crisis.

While media struggles, disinformation thrives. We are already seeing fearmongering, fake news about the EU response, and increased threats to freedom of the press.

For more than two decades we have provided free, independent, multilingual reporting on the European Union. We continue to believe in Europe, and we hope you do too.

Your financial support at this critical time will allow our network of newsrooms across Europe to continue their work when Europe needs it most.

Contribute to our reporting

The need for fast, accurate and balanced information is always important. We value EURACTIV's good, independent journalism and support this initiative

Mella Frewen, Director General of FoodDrinkEurope

EURACTIV plays a vital role in bringing Europe closer to its citizens. EURACTIV has long recognised that the story of Europe has to be told across the continent, and not just in Brussels. We need to support a truly European and informed debate.